Investors unnerved as global events weigh on markets

Nearly 4 per cent of the value of the sharemarket was wiped away this week as investors absorbed talk of the US Federal Reserve's plan to tighten monetary policy.

And bond traders set off global currency markets as they voiced their displeasure of the state of monetary policy in Japan.

The Reserve Bank kept the cash rate on hold, at 2.75 per cent, just before the release of weaker-than-expected economic data which showed mixed fortunes across the economy. The mix of negative data had analysts using phrases such as "tipping point" and "fundamental correction".

For the week, the benchmark ASX200 fell 188 points, or 3.8 per cent, to 4737.70, while the broader All Ordinaries Index lost 184.7 points, or 3.8 per cent, at 4729.3.

Since hitting its peak of 5220.99 on May 14, the bourse has shed a massive 9.3 per cent. It is now up just 0.67 per cent this calendar year.

Fund managers said that the whipsawing of currency and equity markets was a consequence of talk about the US Federal Reserve's plans to ease the pace of its money printing program.

"I think the rally over the last nine months has been largely illusory," David Hobart, Blue Sky Apeiron, said.

"It has been predicated on the expectation of quantitative easing going on forever, and really it has just been a momentum-driven rally on that belief ... I think history will look back on the last four years and say we were seeing a four-year rally when really it was a correction inside an ongoing bear market."

The Australian dollar fell below US95¢ at one stage, continuing the downward trend of the past few weeks.

The dollar has now fallen from US103¢ to US95¢ in less than a month, and currency strategists have been scrambling to revise their projections for where they think the currency will be sitting by year's end.

Westpac's chief currency strategist Robert Rennie said the sheer pace of expansion of the US Fed's balance sheet was getting into territory that "some would call alarming and other truly incredible".

"We're getting into a situation where the US Fed is formally discussing 'tapering' [slowing down the rate at which it prints money], and the Bank of Japan's liquidity program isn't working like it's supposed to," Mr Rennie said.

"I think we were at that classic tipping point, where we only needed one piece of bad news ... and that was it."

Tim Rocks, Nomura: "I think the market's in a transition from a honeymoon period about quantitative easing to a much more realistic assessment. Australia has been the worst performing major market since this recent rally began, and I think what is going on in Australia is we're just moving into a new phase of the mining bust.

"The official unemployment data is a bit of a mess at the moment because of the sampling changes we're putting through, but it's still reasonably clear that the economy turned a corner sometime in February or March and it's now heading down reasonably quickly."

Justin Braitling, director, Watermark Funds Management, said there was a lot of concern among fund managers now about a recession next year.

"It's a combination of the income shock and the capital stock rolling over that will mean activity is much softer in 2014," he said.